EU diplomat: FTA with EU will help to modernise the Ukrainian economy

The EU-Ukraine Deep and Comprehensive Free Trade Area, a central part of the Association Agreement, will not only enhance bilateral trade by removing import tariffs on most goods, but will also help to modernise the Ukrainian economy.

Nicholas Burge, Head of the trade and economic section of the Delegation of the European Union to Ukraine

Nicholas Burge, Head of the trade and economic section of the Delegation of the European Union to Ukraine, explained this in detail during his meeting with students of EU Study Days, an education project launched by the EU Delegation. Find below key points made by the diplomat.

On Ukraine’s macroeconomic situation. Ukraine experienced a significant slowdown of economic growth last year, with GDP increasing only by 0,2%, down from 4,2% in 2010, and 5,2% in 2011. In the first quarter of 2013, this economic contraction has continued and forecasts for 2013 by the key international financial institutions (IMF, World Bank, EBRD) are all for zero or negative growth.

Ukraine’s economic growth has traditionally relied on exports. But the market for one of the major export goods, steel, has not recovered since the crisis of 2008-2009. And other exports are also struggling in current economic conditions. Today Ukraine imports more than it exports, and the gap between exports and imports is growing. The current account deficit topped $14,5 billion (8,3% of the GDP) in 2012, up from 5,5% of GDP in 2011.

On foreign direct investment. The EU represents around 80% of all foreign direct investment (FDI) stock in Ukraine. But FDI fell during 2012; the EU invested only €4,3 billion in 2012, down from €5,2 billion in the previous year. One reason for this is that the business and investment climate is poor, and seems to be getting worse.

On EU-Ukraine trade relations. EU represents about 33% of Ukrainian trade turnover. Ukraine represents only about 2% of trade for the EU. There is huge potential for growth on both sides.

On the Deep and Comprehensive Free Trade Agreement (DCFTA). TheDCFTA is the most ambitious bilateral agreement that the EU has ever negotiated with a third country. It will not only open up the EU market for the country by removing or reducing import tariffs and quotas, but will also remove non-tariff barriers by harmonising laws, standards and regulations across all economic sectors. It will therefore boost growth, increase trade, attract investments and transform the Ukrainian economy.

It is “deep” because it tackles almost the whole of the EU’s legislative acquis, for example, internal market law. And it is “comprehensive” because it covers all economic sectors and activities.

95% of import tariff lines will be set to zero. The rest will be reduced. In contrast to the current situation, where tariffs can be used to prevent competition and innovation, this will bring more investment, new technologies, higher wages and growth, better employment opportunities and, eventually, make the country more competitive.

Students of the EU Study Days project

Changes which the DCFTA will bring to Ukraine. Lower tariffs will lead, first, to lower costs for businesses which trade between the EU and Ukraine. We estimate that Ukrainian exporters will save €487 million per year due to reduced customs duties. Ukrainian agriculture will benefit from most cuts – around €330 million for agricultural products and €53 million for processed agricultural products.

If all the technical regulations and standards are aligned, a company producing goods in Ukraine will be able to sell those same goods on the EU market without additional costs. In parallel, EU companies will be interested in investing and bringing their technical know-how into Ukraine. The DFCTA will also result in the alignment of rules on public procurement and competition policy. It will allow smaller business to get easier access to capital.

In the sphere of services it will result in liberalisation and alignment with EU practices. Ukraine is strong in distribution services and the communication sector and could seize the larger part of that market.

The model of the DCFTA has already transformed many of the economies of central Europe.

If the DCFTA is fully implemented, it will completely revolutionise the economic landscape of the country, including economic, trade and investment relations between Ukraine and the EU.

On the adaptation period. Adaptation to the DCFTA will require about 7-10 years. The agreement foresees a phasing-in of the new requirements. That time period will give a chance for companies to adjust to the new climate.

On other trade agreements. The DCFTA does not affect Ukraine’s sovereign right to negotiate other trade agreements with other countries.

In contrast, the Russia-led Customs Union does require the transfer of parts of Ukraine’s sovereignty to a supra-national level. Therefore if Ukraine became a full member of the Customs Union, it would be impossible for Ukraine to independently have trade agreements with any other country or group of countries, including with the EU.

On Ukraine’s EU membership prospects. The DCFTA is primarily a blueprint for Ukraine’s own economic transformation but it is also based on the economic requirements for EU membership. So if, in some five or seven years time, when all DCFTA requirements are implemented, Ukraine knocks on the EU door saying that it is ready for EU membership, it would be very difficult for the EU to say “no”.